Goldman upbeat on grains, despite 'bearish' Wasde

Goldman Sachs flagged the likelihood of higher corn and wheat prices, dismissing as temporary any negative reaction to a "bearish" US government report.

The bank,  which also restated a forecast of $20-a-bushel soybeans, concurred with the consensus thinking that the US Department of Agriculture's monthly Wasde crop report released on Wednesday held negative factors for corn and wheat values.

The USDA surprised commentators by raising, not lowering, its estimate for domestic corn stocks at the close of 2012-13, cutting expectations for feed and export demand and making a smaller-than-expected downgrade to its harvest forecast.

And the Wasde also made a relatively modest downgrade to expectations for world wheat inventories at the close of 2012-13, making now allowance for recent talk of drought damage to Australia's crop, and flood losses to Argentina's,

'Prices not high enough'

However, Goldman analyst Damien Courvalin said that while the USDA numbers would likely bring "near-term corn and wheat price weakness", markets would recover to levels well above levels Chicago is pricing in.

For corn, current values are "not high enough to sufficiently ration ethanol demand at current gasoline prices", he said.

Furthermore, the USDA looked set, in October's Wasde report, to cut its forecast for the number of corn acres which will make it through to being harvested, rather than being cut for silage or abandoned.

The bank forecast harvested acres at 85.3m, 2.1m acres below the current USDA estimate, and equivalent to a drop of 255m bushels in production.

And it foresaw Chicago prices of the grain reaching $9.00 a bushel in three months' time, 17% above the level the December contract was trading at on Thursday.

Decline in wheat stocks

For wheat, the bank forecast further downgrades to USDA estimates for world supplies, "especially in Australia, and as a result lower global inventories and higher wheat prices".

The outlook for wheat supplies was "poised to tighten further", Mr Courvalin said, flagging in particularly the drop in stocks in countries outside China and India, which will drop to their lowest level since 2007-08 when wheat prices were on their run up to a record high.

Inventories in China and India, rarely available to the world market, are viewed as largely irrelevant to global pricing, with greater importance attached to levels of stocks in major exporters such as the former Soviet Union and the US.

Goldman said that threats to its forecast for Chicago wheat prices - which it foresees standing at $9.80 a bushel in three-months' time, some 10% above December futures were "skewed to the upside".

"In particular, another crop failure would likely push wheat prices sharply higher to limit animal feed demand in the face of inelastic human food demand."

Cautious forecasts

The comments follow some downbeat price outlooks by other commentators, including University of Illinois agribusiness economist Darrel Good.

"The recent price decline for corn reflected clear indications of a slowing in consumption and some recent reports of higher-than -expected yields," Dr Good said.

Unless data from an inventory report later this month "provides a major surprise, the slowing pace of consumption suggests that corn prices have likely peaked".

At broker RJ O'Brien, Richard Feltes at RJ O'Brien said that "further damage" to Chicago corn price charts "along with large fund long positions, suggests the potential for erosion in the December corn contract into the $7.40-a-bushel area, in the absence of dire yield reports out of western Midwest".

And even before the Wasde, Societe Generale cautioned that futures prices were too generous.

'Higher soybean prices required'

However, there was apparently universal thinking that the Wasde report appeared supportive to soybean price prospects.

The briefing's "confirmation of extremely small [US] supplies and the ongoing rapid pace of consumption underscore the need for high prices to ration the small crop", Dr Good said.

"Following recent price declines, prices are now expected to strengthen modestly, at least until there is some confirmation of a slowdown in consumption and crop size is confirmed next month."

Goldman Sachs restated a forecast of Chicago soybeans futures reaching $20 a bushel on a three-month horizon, some 9% above the current price of the January contract.

"Given critically-low US and South American inventories, we believe that higher soybean prices will be required to limit demand in the coming months," Mr Courvalin said.

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